Fixing Your Mortgage For 25 Years

The Fool shares its views on the latest mortgage from Nationwide, which is fixed for 25 years!

In How Long Should You Fix Your Mortgage For? I tested the hypothesis that all fixed-rate mortgage deals work out about the same, regardless of how long they are fixed for. The gist of the article was that the most important thing is simply to make sure you're one of the people who has some kind of mortgage deal.

Of course, as I explained in that article, it's not quite that simple. It's important to compare mortgages and assess your personal circumstances to find the deal that's most suitable for you. That's certainly the case with Nationwide's new 25-year fixed-rate mortgage.

Nationwide is not the first company to sell such a mortgage, but it's by far the biggest. Here are the pros:

Its deal is 5.49% for 25 years, which means that, provided you never move home, you know for certain the maximum cost of buying your home.
It could even cost less, as it allows you to overpay by £500 per month.
There is something very appealing in the idea that you will never be hard-pressed by a rapid rise in interest rates.
The 3% early-repayment charge ends after ten years. If you choose to get out after that period you won't be penalised.
...Thus, if you compare this deal over a ten-year period with the other existing ten-year fixed deals, it's not much more expensive. Based on a £180,000 loan, it costs £133,700 including charges. The Fool's comparison tables show that the best ten-year deal is with Abbey and would cost £131,600, or just £2,100 less. Therefore, if you wanted to fix for ten years anyway, you're paying an extra couple of thousand for the option to keep the same rate after that period, which would be nice if interest rates have risen!
Finally, this loan is portable, so you're not confined to living in the same shack you started with.

Let's now look at the downsides:

Firstly, it costs £2,000 more than a ten-year fixed deal! That's £200 extra per year.
Interest rates may fall over the ten years, or competitors may simply offer much better deals that you'll miss out on.
Ten years is a long time to be tied to the same mortgage. Of course, the loan is portable, but if you buy a more expensive property you'll have to get an additional mortgage and such mortgages can be expensive. Plus, if you want to downsize within ten years, you may have to pay off the mortgage and get a new one, which will cost you 3% of the outstanding loan! It might be cleaner to be able to break away and search the whole mortgage market again.
Furthermore, if you move home and need to remortgage or get an additional mortgage, you become affected by the latest interest rates again.
If you get a large inheritance or bonus, and you want to pay off a large chunk of your mortgage early, you won't be able to do this without penalty.

Now, let's consider interest rates. It's not possible to know where they'll be in 25 years, or how schizophrenic they'll be in the meantime. Some pundits suggest that rates will never again be as high as they were twenty-odd years ago, although I think any economic forecasting should be taken with a pinch of salt. ('The only function of economic forecasting is to make astrology look respectable.' J.K Galbraith.)

I still believe the most important thing is to simply be in a deal -- don't be lazy and pay the standard variable rate. What's more, if you're in a deal I reckon the costs work out largely even whether you switch between deals or sign up for a longer one. However, if you're looking to upsize significantly over the years, or to throw lots of money at paying it off early, this 25-year loan probably isn't suitable for you. There will be all sorts of personal circumstances that will affect whether this loan is right for you, so think carefully!

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